Hotel companies in India are seeing a steady growth spurt after the COVID gloom and the trend is set to continue at least until the end of the next financial year, said a report from JM Financial Securities.
Since 2022, the industry has been growing even faster than the pre-COVID period. During the ten years leading up to the COVID pandemic, the hospitality industry in India had been seeing slow growth due to persistent unfavourable demand.
Not surprisingly, last year saw a record number of hotel rooms coming into the market. “The year 2022 witnessed a record number of branded hotel signings (19,860 keys) largely following the new hotel openings that also recorded a new high (9,961 keys).” said the report.
The report added that this trend is set to continue through the coming years as India is hosting events such as the Cricket World Cup and the Miss World 2023 finale.
“The second half of the financial year 2024 would be one of the strongest periods for hotel companies in the last 10 years, on the back of events like the Cricket World Cup, Miss World 2023 pageant finale and a robust wedding season,” the report noted.
On the other hand, the report also pointed out that the hospitality industry in India remains one of the sectors that received less investments over the past few years.
“Over the last 6 years, the cumulative investment in the hospitality industry was around 1bn USD, at an annual average of 172mn USD. If we leave out the year 2019, wherein the sector saw investments worth USD 762mn, the average annual investment value comes down to around 50mn USD.”, the report noted.
However, investments have seen an uptick during the year 2022, and are expected to improve significantly over the coming years. The first half of the current year has seen a significant increase in investment, especially due to “NCLT proceedings of debt-heavy premium assets located in the strong markets such as Mumbai and Bengaluru,” the report noted.
“We expect the investment momentum to continue into the second half of 2023 (around $88mn) and 2024, based on the exceptional performance of the hospitality sector, backed by strong macroeconomic fundamentals, growth in commercial markets and increase in air connectivity”, said the report.
Another area of growth in the industry is franchise hotels - a new experiment in the industry which were introduced during the pandemic period. Before the pandemic, hotels used to be either fully owned — in which case the owner and the operator of the hotels would be the same — or under management, in which the property would be owned by a real estate company, but the hotel would be completely managed by the staff of a hotel chain like Marriot.
Franchise hotels are different, as the hotel chain does not depute its staff to run or manage the hotel, which is run entirely by a franchisee. This model is gaining momentum and showing good signs of progress especially in cities like Bangalore, Delhi, Chennai, Hyderabad, Mumbai, Pune, Kolkata, and Ahmedabad.
Risks and Challenges
At the same time, the report also anticipates short-term disruptions and some risks that could pose challenges to the expected revenue growth. It therefore points out that growth could be non-linear and inconsistent.
Improvements “may not necessarily be achieved in a consistently upward and linear fashion though, as there could be short-term disruptions to an otherwise strong narrative, viz. the high base of FY24E, general elections in May’24, possible risk of IPL moving out of India, an unfavourable mix due to a higher share of corporate travel - possibly getting nearer to pre-Covid levels”
Giving the example of the last general elections in India, which happened during the first quarter of the financial year 2020, and reduced the average hotel occupancy rate by 0.4%, the report stressed that the coming general elections in India could become a temporary disruption for the industry.
At the same time, the industry is expected to recover towards the second half of the financial year 2025. Other potential risks include a slowdown in global economic growth which will affect India’s GDP and impact the domestic tourism and hotel room demand. Any geopolitical crisis can also cause a decline in foreign tourist demand and thereby affect the industry.